CRO Association Our mission is to accelerate the profession of corporate responsibility.
Issue link: http://www.e-digitaleditions.com/i/139175
The CR Meter Supply chain pressures. Executives surveyed by Deloitte see a multitude of supply chain risks that directly affect their businesses, including climate adaptation, regulatory pressures, and the unethical practices of certain business partners. Companies rely on global supplier networks that are largely beyond their immediate control, but those same companies are being held publicly accountable for the actions of those suppliers. Also, the strong emphasis that many companies have placed on supply chain efficiency often reduces the margin for error and makes supply chains more vulnerable to all forms of risk, including ESG risks. In recent years, companies have been hit by a number of major disruptions, including floods in Thailand, the tsunami in Japan, and labor unrest in China and South Africa. Disruptions such as these help explain why ESG survey respondents expect to commit more resources to mitigating environmental and social risks over the next two years. The increasing frequency and financial impact of these types of supply chain risks are not going unnoticed. Social and mobile enablement. A Deloitte risk management survey of 192 U.S. executives found that social media ranks among the top five most important sources of risk. With social and mobile technologies becoming globally pervasive, questionable business practices have no place to hide. Problems that in the past might have remained behind closed doors can now be exposed to the world in a few minutes without a lot of advanced technology—and then scrutinized in detail, long after traditional media sources would have lost interest. What Works—and What Doesn't Many companies today are transforming their cultures to more strongly reflect ESG values and align them with their core mission and strategies. They are actively measuring and mitigating ESG-related risks and improving transparency, using advanced analytics to improve reporting, perceptions, and management of environmental and social risks. These companies are also aligning their business models with their environmental and social goals, and their performance management systems with desired outcomes. Among the senior leaders we surveyed who work at companies that recognize the importance of environmental and social issues, 63 percent said they support changing compensation plans to reflect their ESG commitments. Looking ahead, survey participants expect to commit more human and financial resources to ESG, not only to mitigate risk and improve transparency but also to change the organizational culture. According to the executives surveyed, this commitment will require three crucial actions that are closely linked to the core business: 1) Clear articulation of the company's ESG goals and values to all stakeholders; 2) Improved alignment of the ESG strategy with the overall company mission; and 3) A demonstrated business case for investment in ESG initiatives. These actions can boost a company's competitiveness by making it more attractive to investment capital and top talent in a global marketplace that is increasingly conscious of ESG issues and risks. Aligning ESG issues and corporate citizenship with commerce can help companies create shareholder value in three measurable ways: pinch, push, and shift. Pinch. Downside risks should be reduced or "pinched," especially in a global marketplace that is increasingly volatile, resource-constrained, and socially engaged. One way to do this is by integrating ESG and financial reporting, which can increase transparency, improve understanding of ESG risks, and help drive targeted mitigation strategies. Improved transparency can also help build trust with customers, investors, and employees, creating a halo effect that makes it easier for a company to earn forgiveness when things go wrong, while getting more credit for things it is doing right. Push. Companies can also leverage social and environmental issues to create new product and service innovations that drive revenue and reduce operating costs. Deloitte's research on innovation shows that leaders on ESG issues are over 400 percent more likely to be considered innovation leaders. For example, Nike's Considered Design initiative has enabled the company to recycle 82 million plastic bottles into high-performance sportswear, reduce waste by 19 percent in its footwear business, increase the use of environmentally preferred materials by 20 percent, and achieve a 95 percent reduction in volatile organic compounds. In addition, our ESG survey shows that 32 percent of senior executives expect more than 5 percent of future annual revenue growth to come from products and services that reduce environmental and social impacts, while another 32 percent expect 1 to 5 percent of future annual revenue growth to come from those same kinds of sources. Shift. Weaving ESG factors into the fabric of a company can improve shareholder value over time by permanently shifting the expected share price to a higher level, creating a valuation premium. Part of this shift comes from pinch and push, which strengthen a company's brand, reduce risk, and fuel innovation. Another part comes from improved operating efficiency and reduced waste, which can significantly reduce costs and increase profitability. In addition, a strategic approach to ESG issues can boost a company's value by helping to attract financial and human capital. Responsible enterprises attract more funding and enjoy a lower cost of equity capital than their less responsible counterparts. They also have an easier time attracting talent—especially younger workers, who tend to be particularly conscious of social and environmental issues. These effects can help create a lasting competitive advantage. The increasing focus on ESG issues is a long-term trend, driven by rising public awareness and concerns about adaptation to a changing business environment, income disparity, and quality of life around the world. Companies that are further along the journey toward effective integration of ESG issues into risk management approaches, business operations, and strategy will likely be in a stronger position to compete in the future. In particular, they will likely have the benefit of being able to take a strategic and measured approach when responding to stakeholder pressures and environmental crises. On the other hand, companies that continue to treat ESG issues merely as compliance could be missing an opportunity to be rewarded for the good work they do, making it harder to attract the customers, talent, and capital that are crucial to value creation. Chris Park is principal of strategy and operations and national leader of sustainability and climate change for Deloitte Consulting LLP. Dinah A. Koehler is senior research manager of sustainability and climate change for Deloitte Services. The full report can be accessed at http://dupress. com/articles/the-responsible-enterprise/?top=6. 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